2007 ANNUAL REPORT. Outside Front Cover

Transcription

1 Outside Front Cover 2007 ANNUAL REPORT

2 Company Overview Magna, the most diversified global automotive supplier, designs, develops and manufactures technologically advanced automotive systems, assemblies, modules and components, and engineers and assembles complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks. Financial Highlights Sales (U.S.$ Billions) Our capabilities include: 10 5 interior systems seating systems closure systems metal body and chassis systems vision systems electronic systems exterior systems powertrain systems roof systems complete vehicle engineering and assembly 1, Operating Income (U.S.$ Millions) Magna has approximately 84,000 employees in 241 manufacturing operations and 62 product development and engineering centres in 23 countries Net Income (U.S.$ Millions) Diluted Earnings Per Share (U.S.$)

3 Global Operations (As of December 2007) Europe: Austria 15 7 Belgium 2 Czech Republic 4 1 England 11 3 France 4 4 Germany North America: Canada Mexico United States Hungary 1 Ireland 2 Italy 3 Poland 4 Slovak Republic Spain 4 2 Asia Pacific: China 15 4 India Japan Korea Sweden 1 South America: Brazil 2 Turkey 1 Africa: South Africa 3 Manufacturing Operations: 241 Product Development and Engineering Centres: 62 Total Number of Employees (As of December 2007) Europe 28,900 North America 50,200 Asia Pacific 3,900 South America 800 Africa 100 Operating Principles Magna s entrepreneurial corporate culture, highlighted in the principles shown here, is the reason for Magna s success and our greatest competitive advantage. Decentralized Operating Structure Magna s manufacturing divisions operate as independent profit centres aligned by geographic region in each of our product areas. This decentralized structure prevents bureaucracy and makes Magna more responsive to customer needs and changes within the global automotive industry, as well as within specific regions. Employee Involvement By keeping operating units relatively small and flexible, Magna fosters greater employee involvement and initiative. This environment also allows Magna to recognize and reward individuals contributions and maintain open communication. Entrepreneurial Managers Entrepreneurial, hands-on managers with strong tooling, engineering and manufacturing backgrounds run Magna s divisions. Division managers are responsible for ensuring profitability, achieving customer satisfaction and upholding the principles of the Magna Employee s Charter. Employee Profit Sharing and Ownership Through the Equity Participation and Profit Sharing Program, employees receive ten percent of Magna s qualifying annual profits before tax. As part-owners working in an environment where productivity is rewarded, Magna employees are motivated to produce quality products at competitive prices.

4 Magna s capabilities include: Metal Body and Chassis Systems Cosma International Body Systems Chassis Systems Technology, Engineering & Tooling Systems Closure Systems Magna Closures Door Modules Window Systems Power Closure Systems Latching Systems Handle Assemblies Driver Controls Complete Vehicle Engineering and Assembly Magna Steyr Complete Vehicle Engineering & Assembly Fuel Systems Space Technology Exterior Systems Decoma International Front & Rear End Fascia Systems Greenhouse & Sealing Systems Exterior Trim Vehicle Enhancement Packages Plastic Body Panels Seating Systems Intier Automotive Seating Complete Seating Solutions Seat Mechanisms Interior Systems Intier Automotive Interiors Sidewall & Trim Systems Cockpit Systems Cargo Management Systems Overhead Systems Carpet & Loadspace Systems Sun Visors Vision Systems Magna Donnelly Interior Mirrors Exterior Mirrors Actuators Camera Vision Systems Electronic Systems Magna Electronics Driver Assistance & Safety Systems Electromechanical & Power Systems Body Electronics Lighting Systems Engine Electronics & Liquid Sensors Powertrain Systems Magna Powertrain Engine Transmission AWD/4x4 Systems Drive & Axle Systems Mechatronics Engineering Services & System Integration Roof Systems Magna Car Top Systems Panoramic Roof Modules Soft Tops Retractable Hard Tops Removable Roof Panels

5 Magna International Inc. Financial Review and Other Information 2007 The Chairman s Message 1 The Magna Corporate Constitution 2 The Magna Employee s Charter 3 Management s Message to Shareholders 4 Financial Review and Other Information Management s Discussion and Analysis of Results of Operations and Financial Position 6 Management s Responsibility for Financial Reporting 37 Independent Auditors Report on Financial Statements 38 Independent Auditors Report on Internal Controls Under Standards of The Public Company Accounting Oversight Board (United States) 39 Consolidated Statements of Comprehensive Income 40 Consolidated Statements of Retained Earnings 41 Consolidated Statements of Cash Flows 41 Consolidated Balance Sheets 42 Notes to Consolidated Financial Statements 43 Supplementary Financial and Share Information 77 Corporate Directory Inside Back Cover

6 The Chairman s Message As Magna celebrated its 50th anniversary in 2007, we laid the foundation for success in the years ahead in three important ways. First, we completed the arrangement involving Magna and Russian Machines, which was approved by shareholders last August, in order to set Magna on course for further growth outside of our traditional markets. Second, together with the Canadian Auto Workers (CAW), we entered into the Framework of Fairness Agreement a unique set of principles which balances the needs of employees and business and which represents a new, non-confrontational labour relations model. Finally, we continued our pursuit of advanced technologies through innovative programs and development of a centre for technological innovation. Russian Machines. I see enormous opportunities for Magna in Russia, which is one of the world's major emerging markets. Russia s economy is growing rapidly, its income level is increasing, demand for new cars is strong and the automotive industry in Russia is developing. Magna has extensive manufacturing capabilities and advanced technical know-how and thereby we believe this is a great opportunity for us to participate in the growing Russian automotive market. The access to the Russian market and domestic OEMs offered to us through our strategic partner, Russian Machines, together with our own contacts at North American, Western European and Asian OEMs operating or opening facilities in Russia, should give Magna a significant advantage in realizing the opportunities in that market with domestic OEMs and foreign-based ones as well. Frank Stronach Chairman of the Board Framework of Fairness. Competition from automakers in new and emerging markets will pose a great challenge to the more mature and established automotive industries of North America and Western Europe. The North American auto industry, in particular, continues to struggle with a number of structural problems. While recent agreements between the North American-based OEMs and the UAW have improved the situation, I believe further steps are necessary to further improve the global competitiveness of the North American-based OEMs in the face of intensified competition. One such step is the groundbreaking Framework of Fairness Agreement that Magna signed with the CAW in October of last year. I believe this new labour relations model based on social economic justice can serve as a prototype for the future of management/labour relations within the North American automotive industry one that will allow it to become more efficient and more competitive, with the ultimate goal that we protect jobs and improve the living standards of employees. Advanced Technologies. Going forward, our success will depend in large part on our ability to develop new, highly advanced technologies that enhance the vehicles being produced by our customers. To achieve this goal, we are further involving our employees in a new program designed to bring forward innovative new ideas, with the objective of developing commercially successful new products. We want to win the hearts and minds of employees so that they will not only work hard but also think about new and innovative ways to make a better product for a better price. We will also open a new Centre of Innovation in North America that will identify, develop and train Magna s next generation of managers while also incubating new products and technologies that will eventually be spun out into new Magna manufacturing divisions. In closing, I wish to thank Basic Element, the parent company of Russian Machines, and its founder and Chairman, Oleg Deripaska. Their investment in our company is a sign of the strong confidence they have in our technologies, capabilities and people. I am very optimistic that this arrangement will be beneficial for both Magna and Russian Machines, as well as for Magna shareholders and for our employees. The culture, business philosophies, and operating principles that have been the cornerstone of Magna s success for the past 50 years will be preserved under the terms of this agreement and will continue to be the driving force of Magna s growth in the years ahead. I also wish to thank Buzz Hargrove, President of the Canadian Auto Workers, and his entire team, for the leadership they showed by agreeing to partner with us in creating a new labour relations model through the Framework of Fairness. Finally, I wish to thank our employees, managers, shareholders and customers for their participation in our success. More than 50 years after opening our first tool shop in a rented garage, we are still growing, and with the actions we are taking today, we are charting a course for even greater growth in the years ahead. /s/ Frank Stronach Frank Stronach Chairman of the Board 1 Magna International Inc Annual Report

7 The Magna Corporate Constitution Employee Equity and Profit Participation Ten percent of Magna s profit before tax will be allocated to employees. These funds will be used for the purchase of Magna shares in trust for employees and for cash distributions to employees, recognizing length of service. Shareholder Profit Participation Magna will distribute, on average, not less than 20 percent of its annual net profit after tax to shareholders. Management Profit Participation To obtain long-term contractual commitment from senior management, Magna provides a compensation arrangement which, in addition to a base salary below industry standards, allows for the distribution of up to six percent of its profit before tax. Research and Development Magna will allocate a minimum of seven percent of its profit before tax for research and development to ensure its long-term viability. Social Responsibility Magna will allocate a maximum of two percent of its profit before tax for charitable, cultural, educational and political purposes to support the basic fabric of society. Minimum Profit Performance Management has an obligation to produce a profit. If Magna does not generate a minimum after-tax return of four percent on share capital for two consecutive years, Magna s Class A shareholders, voting as a class, will have the right to elect additional directors. Unrelated Investments Magna Class A and Class B shareholders, with each class voting separately, will have the right to approve any investment in an unrelated business in the event such investment together with all other investments in unrelated businesses exceeds 20 percent of Magna s equity. Board of Directors Magna believes that outside directors provide independent counsel and discipline. A majority of the members of Magna s Board of Directors will be outsiders. Constitutional Amendments Any change to Magna s Corporate Constitution will require the approval of its Class A and Class B shareholders, with each class voting separately. Magna s Corporate Constitution publicly declares and defines the rights of employees and investors to participate in our profits and growth while also imposing certain disciplines on management. These features strike a balance between employees, investors and management while allowing us to maintain an entrepreneurial environment that encourages productivity. Magna is a public company with two classes of shares: a Class B share which carries a multiple vote, held by management and its associates, and a Class A Subordinate Voting share for investors and employees which carries a single vote. This share structure has been in place since 1978 and enables management to have operating control of Magna on a day-to-day basis, provided it adheres to the Corporate Constitution. Magna International Inc Annual Report 2

8 The Magna Employee s Charter Magna is committed to an operating philosophy which is based on fairness and concern for people. This philosophy is part of Magna s Fair Enterprise culture in which employees and management share in the responsibility to ensure the success of the company. It includes these principles: Job Security Being competitive by making a better product for a better price is the best way to enhance job security. Magna is committed to working together with you to help protect your job security. To assist you, Magna will provide: Job Counselling Training Employee Assistance Programs A Safe and Healthful Workplace Magna strives to provide you with a working environment which is safe and healthful. Fair Treatment Magna offers equal opportunities based on an individual s qualifications and performance, free from discrimination or favouritism. Competitive Wages and Benefits Magna will provide you with information which will enable you to compare your total compensation, including total wages and total benefits, with those earned by employees of your competitors, as well as with other plants in your community. If your total compensation is found not to be competitive, then your wages will be adjusted. Employee Equity and Profit Participation Magna believes that every employee should share in the financial success of the company. Communication and Information Through regular monthly meetings between management and employees and through publications, Magna will provide you with information so that you will know what is going on in your company and within the industry. The Hotline Should you have a problem, or feel the above principles are not being met, we encourage you to call the Hotline or use the self-addressed Hotline Envelopes to register your complaints. You do not have to give your name, but if you do, it will be held in strict confidence. Hotline Investigators will answer your call. The Hotline is committed to investigate and resolve all concerns or complaints and must report the outcome to Magna s Global Human Resources Department. Employee Relations Advisory Board The Employee Relations Advisory Board is a group of people who have proven recognition and credibility relating to humanitarian and social issues. This Board will monitor, advise and ensure that Magna operates within the spirit of the Magna Employee s Charter and the principles of Magna s Corporate Constitution. 3 Magna International Inc Annual Report

9 Management s Message to Shareholders Operating Highlights We are pleased with our 2007 results, which included higher sales, increased average dollar content per vehicle in both North America and Europe, higher operating income, higher net income, and increased diluted earnings per share. Our improved results were achieved despite lower vehicle production volumes in North America, lower complete vehicle assembly volumes and sales at Magna Steyr, and continuing price pressure from our customers. We also had a number of other achievements in 2007, including: Siegfried Wolf Co-Chief Executive Officer The successful launch or ramp-up of a significant amount of business: In North America, much of the new business we launched was in the crossover utility vehicle segment, which has grown rapidly in the past few years. We are well represented in a number of product areas in this high growth segment. Important new business awards: As an example, we were awarded a vehicle assembly contract by BMW to build its new MINI Sports Activity Vehicle (SAV) at our Magna Steyr assembly facility in Graz, Austria. Annualized sales associated with the MINI SAV program are expected to be in excess of $1 billion once the program reaches full production. Receipt of a number of major supplier awards from our customers: For example, our Cosma International operating unit won the General Motors 2006 Supplier of the Year award; four of our operating divisions won Ford Motor Company World Excellence awards; eleven of our divisions won Honda North America supplier awards for best-in-class performance; and one of our divisions won two Toyota awards. Donald J. Walker Co-Chief Executive Officer Continued growth of our business and manufacturing footprint outside of our traditional markets of North America and Western Europe: Such growth contributed to a 53% increase in Rest of World production sales. Our growth in Rest of World sales is important, since much of the future growth in global vehicle production is expected to occur in emerging markets such as Russia, various countries in Eastern Europe and Asia. Underperforming Divisions: We realized operating efficiencies at some of our facilities, and made progress at certain underperforming divisions. Despite these and other positives, 2007 also proved to be a difficult year for us in a number of respects. In addition to the industry challenges we continue to face, we incurred losses at a number of underperforming facilities, particularly at certain powertrain and interiors facilities in North America. Furthermore, our 2007 results were adversely impacted by fixed asset impairment charges in North America and Europe, restructuring charges related to facility closures and rationalizations as we continue to expand our manufacturing footprint in lower cost countries, and certain tax-related charges. Vincent J. Galifi Executive Vice-President and Chief Financial Officer Although we did not make any significant acquisitions or dispositions during 2007, we completed a plan of arrangement involving Russian Machines. We believe that our arrangement with Russian Machines will allow us to accelerate our strategic efforts to capitalize on the significant growth opportunities in the Russian automotive market, as well as other emerging markets. Magna International Inc Annual Report 4

10 In addition, we signed a unique Framework of Fairness Agreement with the Canadian Auto Workers' union. The Framework of Fairness Agreement establishes a new labour relations model based on a unique set of principles that balance the needs of employees with the needs of business to remain competitive. We also completed a substantial issuer bid pursuant to which we purchased for cancellation 11.9 million Class A Subordinate Voting Shares. In addition to the substantial issuer bid, we also purchased 2.7 million Class A Subordinate Voting Shares under an ongoing normal course issuer bid, which allows for the purchase of an additional 6.3 million shares before its expiry on November 11, We ended 2007 with a strong balance sheet, including a substantial net cash position in excess of $2 billion. We expect that our net cash will help us weather any potential storms in the industry and provide opportunities to continue to grow our business and further enhance shareholder value. Going Forward We anticipate that 2008 will be another challenging year, particularly in the North American market. Our main focus remains on improving underperforming operations, diversifying our customer base and expanding our geographic footprint, primarily in Asia and Eastern Europe, in particular Russia. In addition, we remain committed to developing or attaining leading-edge technologies for our customers. In closing, we would like to thank our shareholders for their vote of confidence in our plan of arrangement with Russian Machines. We believe this relationship will present our company with a number of exciting opportunities for growth in a very promising market. We also wish to thank our customers, who continue to reward us with new and repeat business. And finally, we wish to thank our employees and managers around the world, with whom we were proud to celebrate our 50th anniversary during the fall of /s/ Siegfried Wolf /s/ Donald J. Walker /s/ Vincent J. Galifi Siegfried Wolf Donald J. Walker Vincent J. Galifi Co-Chief Executive Officer Co-Chief Executive Officer Executive Vice-President and Chief Financial Officer 5 Magna International Inc Annual Report

11 Magna International Inc. Management's Discussion and Analysis of Results of Operations and Financial Position All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures and average dollar content per vehicle, which are in U.S. dollars, unless otherwise noted. When we use the terms "we", "us", "our" or "Magna", we are referring to Magna International Inc. and its subsidiaries and jointly controlled entities, unless the context otherwise requires. This MD&A should be read in conjunction with the accompanying audited consolidated financial statements for the year ended December 31, 2007 which are prepared in accordance with Canadian generally accepted accounting principles ["GAAP"], as well as the "Forward-Looking Statements" on page 36. This MD&A has been prepared as at March 20, Overview We are a leading global supplier of technologically advanced automotive systems, assemblies, modules and components. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia, South America and Africa. Our product capabilities span a number of major automotive areas including: the design, engineering, testing and manufacture of automotive: interior systems; seating systems; closure systems; metal body and chassis systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; as well as complete vehicle engineering and assembly. We follow a corporate policy of functional and operational decentralization, pursuant to which we conduct our operations through divisions, each of which is an autonomous business unit operating within pre-determined guidelines. As at December 31, 2007, we had 241 manufacturing divisions and 62 product development and engineering centres in 23 countries. Our operations are segmented on a geographic basis between North America, Europe and Rest of World (primarily Asia, South America and Africa). A co-chief Executive Officer heads management in each of our two primary markets, North America and Europe. The role of the North American and European management teams is to manage our interests to ensure a coordinated effort across our different product capabilities. In addition to maintaining key customer, supplier and government contacts in their respective markets, our regional management teams centrally manage key aspects of our operations while permitting our divisions enough flexibility through our decentralized structure to foster an entrepreneurial environment. Highlights We are pleased with our 2007 results, including higher sales, average dollar content per vehicle in both North America and Europe, operating income, net income, and diluted earnings per share. Our improved results were achieved despite lower vehicle production volumes in North America, particularly at General Motors ("GM") and Ford Motor Company ("Ford"), lower complete vehicle assembly volumes and sales, and continuing price concessions given to our customers. We also had a number of other achievements in 2007, including the successful launch or ramp-up of a significant amount of business, important new business awards, and supplier awards from a number of our customers, including GM, Ford, Toyota and Honda. In North America, much of the new business we launched was in the crossover utility vehicle segment, which has grown rapidly in the past few years. We are well represented in a number of product areas in this high growth segment. Finally, in 2007 we continued to grow our business and manufacturing footprint outside of our traditional markets of North America and Western Europe, which contributed to a 53% increase in Rest of World production sales. Our growth in Rest of World sales is important, since much of the future growth in global vehicle production is expected to occur in emerging markets such as Russia, various countries in Eastern Europe and Asia. In addition to the launch or ramp-up of new business, our improved results reflect operating efficiencies we realized at some of our facilities and progress we made at certain underperforming divisions. Despite the many positives we achieved, 2007 also proved to be a difficult year in a number of respects. In addition to the industry challenges mentioned above, we continued to incur losses at a number of underperforming facilities, particularly at certain powertrain and interiors facilities in North America. Furthermore, our 2007 results were adversely impacted by fixed asset impairment charges in North America and Europe, restructuring charges related to facility closures and rationalizations as we continue to migrate our manufacturing footprint towards lower cost countries, and certain tax-related charges. Although no significant acquisitions or dispositions were made during 2007, we completed a plan of arrangement with Russian Machines and signed a unique Framework of Fairness Agreement with the Canadian Auto Workers' union. We also completed a substantial issuer bid pursuant to which we purchased for cancellation 11.9 million Class A Subordinate Voting Shares. In addition to the substantial issuer bid, we also purchased 2.7 million Class A Subordinate Voting Shares under an ongoing normal course issuer bid, which allows for the purchase of an additional 6.3 million shares before its expiry on November 11, We ended 2007 with a strong balance sheet, including a substantial net cash position. We expect that our net cash will help us "weather the storm" in the industry and provide opportunities to continue to grow our business and further enhance shareholder value. Magna International Inc Annual Report MD&A 6

12 During 2007, we recorded sales of $26.1 billion, an increase of 8% over This higher sales level was achieved as a result of growth in our North American, European and Rest of World production sales offset in part by a decrease in complete vehicle assembly sales, and tooling, engineering and other sales. During 2007, our North American and European dollar content per vehicle increased by 11% and 20%, respectively, over In addition, during 2007, North American vehicle production decreased 2% while European vehicle production levels increased 3%, each compared to We reported strong sales in 2007 despite the fact that two of our largest customers in North America continued to reduce vehicle production levels. While overall North American vehicle production volumes declined 2% in 2007 compared to 2006, GM and Ford vehicle production declined by 8% and 7%, respectively. Operating income for 2007 increased 45% or $360 million to $1.15 billion from $792 million for Excluding the unusual items recorded in 2007 and 2006 (see "Unusual Items" below), operating income for 2007 increased $257 million or 27%. The increase in operating income excluding unusual items was primarily due to additional margins earned on the launch of new programs during or subsequent to 2006, increased margins earned on higher volumes for certain production programs and productivity and efficiency improvements at certain facilities, including underperforming divisions. These factors were partially offset by operational inefficiencies and other costs at certain underperforming facilities, including certain powertrain and interiors facilities in North America, lower margins earned as a result of a decrease in production volumes, costs incurred in preparation for upcoming launches or for programs that have not fully ramped up production, higher employee profit sharing and incentive compensation and incremental customer price concessions. Net income for 2007 increased 26% or $135 million to $663 million from $528 million for Excluding the unusual items recorded in 2007 and 2006 (see "Unusual Items" below), net income for 2007 increased 31% or $202 million. The increase in net income excluding unusual items was primarily a result of the increase in operating income (excluding unusual items) partially offset by higher income taxes (excluding unusual items). Income taxes were higher due to higher operating income partially offset by a decrease in our effective tax rate as described in the "Income Taxes" section below. Diluted earnings per share for 2007 increased 23% or $1.08 to $5.86 from $4.78 for Excluding the unusual items recorded in 2007 and 2006 (see "Unusual Items" below), diluted earnings per share increased 28% or $1.65 primarily as a result of the increase in net income (excluding unusual items) partially offset by an increase in the weighted average number of diluted shares outstanding in 2007, primarily as a result of the Class A Subordinate Voting Shares issued in 2007 related to the Arrangement, as discussed in the "Capital Transactions" section below, and stock options exercised during 2006 and 2007, partially offset by the repurchase and cancellation of Class A Subordinate Voting Shares under the terms of our fully completed Substantial Issuer Bid and ongoing Normal Course Issuer Bid. Unusual Items During 2007 and 2006, we recorded certain unusual items as follows: Diluted Diluted Operating Net Earnings Operating Net Earnings Income Income per Share Income Income per Share Impairment charges (1) $ (56) $ (40) $ (0.35) $ (54) $ (46) $ (0.41) Restructuring charges (2) (39) (27) (0.24) (77) (65) (0.58) Sale of facilities (3) (12) (7) (0.06) (17) (15) (0.14) Sale of property (4) Foreign currency gain (4) Valuation allowance on future tax assets (5) (115) (1.01) Future tax (charge) recovery (5) (48) (0.42) Total unusual items $ (45) $ (183) $ (1.61) $ (148) $ (116) $ (1.04) (1) Impairment Charges In conjunction with our annual goodwill impairment analysis and consideration of other indicators of impairment of our long-lived assets at certain operations, we have recorded long-lived asset impairment charges as follows: Operating Net Operating Net Income Income Income Income Europe $ 12 $ 12 $ 41 $ 38 North America $ 56 $ 40 $ 54 $ 46 7 Magna International Inc Annual Report MD&A

13 Europe Due to recurring losses that were projected to continue as a result of existing sales levels and limited sales growth prospects, during 2007 we recorded asset impairments of $12 million relating to certain assets and facilities in Germany, Austria, the Czech Republic and Spain. During 2006, we recorded asset impairments of $41 million related to certain assets and facilities due to recurring losses that were projected to continue as a result of existing sales levels and limited sales growth prospects. Asset impairments were recorded at an exterior systems facility in Germany, a powertrain systems facility in Austria, interior systems facilities in the United Kingdom and Spain and a seating systems facility in the Czech Republic. North America During 2007, we recorded asset impairments of $44 million related to an interiors systems facility in the United States and certain powertrain facilities in the United States and Canada. The asset impairments were recorded as a result of: (i) ceasing operations and/or use of certain assets at two powertrain facilities; and (ii) losses that were projected to be incurred throughout the business planning period based on existing and projected sales levels. During 2006, we recorded asset impairments of $13 million related to certain interior systems facilities in the United States. The asset impairments were recorded as a result of losses that were projected to be incurred throughout our business planning period based on existing and projected sales levels. (2) Restructuring Charges Europe During 2007, we recorded restructuring charges of $4 million related to the closure of a sunvisors facility in Spain. During 2006, we recorded restructuring charges of $43 million related primarily to closure costs of a mirrors facility in Ireland and an exterior systems facility in Belgium. North America In North America, restructuring charges totalled $35 million for 2007 and $34 million for Specifically, in 2007 we recorded $12 million related to the closure of exterior systems facilities in Canada and the United States, $10 million related to the consolidation of powertrain facilities in Canada and $9 million related to the closure of a mirror facility in the United States. The balance of restructuring and rationalization charges related to a stamping facility in the United States. The restructuring charges in 2006 related primarily to rightsizing a powertrain facility in the United States and restructuring and rationalization charges related primarily to certain powertrain and seating facilities in the United States. In addition, we may incur additional restructuring and rationalization charges during (3) Sale of Facilities During 2007, we entered into an agreement to sell an underperforming exterior systems facility in Germany. As a result, we incurred a $12 million loss on disposition of the facility. During 2006, we sold two underperforming powertrain facilities, which resulted in losses on disposition of $12 million and $5 million in Europe and North America, respectively. (4) Other Unusual Items During 2007, we recorded the following unusual items: we disposed of land and building in the United Kingdom and recorded a gain on disposal of $36 million; and a $26 million foreign currency gain on the repatriation of funds from Europe. (5) Income Taxes In conjunction with our annual goodwill and long-lived asset impairment analyses, during the fourth quarter of 2007, we recorded a $115 million charge to establish valuation allowances against certain of our future tax assets in the United States. Accounting standards require that we assess whether valuation allowances should be established against our future income tax assets based on the consideration of all available evidence using a "more likely than not" standard. The factors we use to assess the likelihood of realization are our past history of earnings, forecast of future taxable income and available tax planning strategies that could be implemented to realize the future tax assets. During 2007, we determined that valuation allowances were required in the United States based on: three year historical cumulative losses at our interior systems and powertrain operations; the deterioration of near-term automotive market conditions in the United States; and Magna International Inc Annual Report MD&A 8

14 significant and inherent uncertainty as to the timing of when we would be able to generate the necessary level of earnings to recover these future tax assets. Also during 2007, we recorded a $53 million charge to future income tax expense as a result of an alternative minimum tax introduced in Mexico, offset in part by a $5 million future income tax recovery related to a reduction in future income tax. During 2006, we recorded a $10 million future income tax recovery as a result of a reduction in future income tax rates in Canada. Capital Transactions During 2007, following approval by our Class A and Class B shareholders, we completed the court-approved plan of arrangement (the "Arrangement") whereby OJSC Russian Machines ("Russian Machines"), a wholly owned subsidiary of Basic Element Limited ("Basic Element"), made a major strategic investment in Magna. Russian Machines represents the Machinery Sector of Basic Element, and includes automobile manufacturer GAZ Group, airplane manufacturer Aviacor and train car manufacturer Abakanvagonmash. Basic Element is a diversified holding company founded in 1997 with assets in Russia, countries of the Commonwealth of Independent States, Europe, Africa, South America and Australia. In accordance with the Arrangement: Russian Machines invested $1.54 billion to indirectly acquire 20 million of our Class A Subordinate Voting Shares from treasury. We purchased 217,400 Class B Shares for cancellation, representing all of our outstanding Class B Shares, other than those indirectly controlled by the Stronach Trust, for $24 million and the number of votes per each Class B Share was reduced from 500 votes to 300 votes. The Stronach Trust and certain members of our executive management combined their respective shareholdings in Magna (in the case of executive management, a portion of their shareholdings), together with the 20 million Class A Subordinate Voting Shares issued as part of the Arrangement into a new Canadian holding company, M Unicar Inc. ("M Unicar"). At September 20, 2007, M Unicar indirectly held 100% of our outstanding Class B Shares and approximately 16% of our outstanding Class A Subordinate Voting Shares collectively representing approximately 68.8% of the votes attached to all the Class A Subordinate Voting Shares and Class B Shares then outstanding. On September 25, 2007, we also completed the previously announced substantial issuer bid ("SIB"), pursuant to which we purchased for cancellation 11.9 million Class A Subordinate Voting Shares, representing 9.2% of our issued and outstanding Class A Subordinate Voting Shares for an aggregate purchase price of $1.1 billion. Following completion of the SIB, M Unicar held shares collectively representing approximately 71.0% of the votes attached to all of our Class A Subordinate Voting Shares and Class B Shares then outstanding. On November 12, 2007, we commenced a normal course issue bid ("NCIB") to purchase for cancellation and/or for purposes of our long-term retention (restricted stock), restricted stock unit and similar programs, up to 9 million of our Class A Subordinate Voting Shares. As at December 31, 2007, we had purchased for cancellation approximately 2.5 million Class A Subordinate Voting Shares and had also purchased approximately 134,000 Class A Subordinate Voting Shares for an aggregate purchase price of $219 million. The NCIB will expire on November 11, 2008, unless extended by us prior to that time. Industry Trends and Risks A number of trends continue to have a significant impact on the global automotive industry and our business, including: declining North American production volumes; the increasing market share of Asian-based OEMs in North America and Europe and the declining market share and the resulting deteriorating financial condition of some of our traditional customers in these markets; the exertion of significant pricing pressure, primarily by North American and European OEMs, including through pre-determined price concessions, significant demands for retroactive price reductions and increased transfer of warranty costs, design and engineering expenses, as well as tooling costs; increased exposure to elevated prices for steel, resin, paints/chemicals and other raw materials and commodities, as well as energy prices; the deteriorating financial condition of the automotive supply base, particularly in North America, and the corresponding increase in operational and financial exposure as many such suppliers become bankrupt or insolvent; the growth of the automotive industry in China, Korea, Thailand, India, Russia, Brazil and other low cost countries, and the migration of component and vehicle design, development, engineering and manufacturing to such lower cost countries; 9 Magna International Inc Annual Report MD&A

15 growth of the A to D vehicle segments (micro to mid-size cars), particularly in emerging markets; the increasing prevalence of vehicles built off high-volume global vehicle platforms; and increasing customer and consumer demand for lighter, more fuel-efficient and environmentally-friendly vehicles, with additional safety features, improved comfort, convenience and space optimization features and advanced electronics systems. The following are some of the more significant risks that could affect our ability to achieve our desired results: The global automotive industry is cyclical and consumer demand for automobiles is sensitive to changes in economic and political conditions, including interest rates, energy prices and international conflicts (including acts of terrorism). Automotive production is affected by consumer demand and may be affected by the foregoing macro factors as well as structural factors such as labour relations issues, regulatory requirements, trade agreements and similar matters. As a result of these and other factors, some of our customers are currently experiencing and/or may in the future experience reduced consumer demand for their vehicles, leading to declining vehicle production volumes, which could have a material adverse effect on our profitability. Although we supply parts to all of the leading OEMs, a significant majority of our sales are to five such customers, three of which are rated as below investment grade by credit rating agencies. We are attempting to further diversify our customer base, particularly to increase our business with Asian-based OEMs. A decline in overall production volumes by any of our five largest customers could have an adverse effect on our profitability, particularly if we are unable to further diversify our customer base. While we supply parts for a wide variety of vehicles produced in North America and Europe, we do not supply parts for all vehicles produced, nor is the number or value of parts evenly distributed among the vehicles for which we do supply parts. Shifts in market share among vehicles (including shifts away from vehicles we assemble) or the early termination, loss, renegotiation of the terms of, or delay in, the implementation of any significant production or assembly contract could have a material adverse effect on our profitability. The financial condition of some of our traditional customers has deteriorated in recent years due in part to high labour costs (including healthcare, pension and other post-employment benefit costs), high raw materials, commodities and energy prices, declining sales and other factors. Additionally, increased gas prices, have affected and could further threaten sales of certain of their models, such as full-size sport utility vehicles and light trucks. All of these conditions could further threaten the financial condition of some of our customers, putting additional pressure on us to reduce our prices and exposing us to greater credit risk. In the event that our customers are unable to satisfy their financial obligations or seek protection from their creditors, we may incur additional expenses as a result of such credit exposure, which could have a material adverse effect on our profitability and financial condition. We have entered into, and will continue to enter into, long-term supply arrangements with our customers which provide for, among other things, price concessions over a pre-defined supply term. To date, these concessions have been fully or partially offset by cost reductions arising principally from product and process improvements and price reductions from our suppliers. However, the competitive automotive industry environment in North America, Europe and Asia has caused these pricing pressures to intensify. Some of our customers have demanded and will likely continue to demand additional price concessions and/or retroactive price reductions. We may not be successful in offsetting all of these price concessions or reductions through improved operating efficiencies, reduced expenditures or reduced prices from our suppliers. To the extent that we are not able to offset price concessions through cost reductions or improved operating efficiencies, such concessions could have a material adverse effect on our profitability. To the extent we refuse to make price concessions to our customers they may not award new business to us, which could also have a material adverse effect on our profitability. We continue to be pressured to absorb costs related to product design, engineering and tooling, as well as other items previously paid for directly by OEMs. In particular, some OEMs have requested that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the piece price of the applicable component. Some of these costs cannot be capitalized, which could have an adverse effect on our profitability until the programs in respect of which they have been incurred are launched. In addition, since our contracts generally do not include any guaranteed minimum purchase requirements, if estimated production volumes are not achieved, these costs may not be fully recovered, which could have an adverse effect on our profitability. Our customers continue to demand that we bear the cost of the repair and replacement of defective products which are either covered under their warranty or are the subject of a recall by them. Warranty provisions are established based on our best estimate of the amounts necessary to settle existing or probable claims on product defect issues. Recall costs are costs incurred when government regulators and/or our customers decide to recall a product due to a known or suspected performance issue, and we are required to participate either voluntarily or involuntarily. Currently, under most customer agreements, we only account for existing or probable warranty claims. Under certain complete vehicle engineering and assembly contracts, we record an estimate of future warranty-related costs based on the terms of the specific customer agreements and the specific customer's warranty experience. The obligation to repair or replace such products could have a material adverse effect on our profitability and financial condition if the actual costs are materially different from such estimates. Magna International Inc Annual Report MD&A 10

16 Prices for key raw materials and commodities used in our parts production, particularly steel, resin and paints/chemicals, as well as energy prices, remain at elevated levels compared to levels earlier this decade, with the possibility of further increases in the future. We have attempted to mitigate our exposure to commodities price increases, however, to the extent we are unable to fully do so through hedging strategies, by engineering products with reduced commodity content, by passing commodity price increases to our customers or otherwise, such additional commodity costs could have a material adverse effect on our profitability. We rely on a number of suppliers to supply us with a wide range of components required in connection with our business. Economic conditions, intense pricing pressures, increased commodity prices and a number of other factors have left many automotive suppliers in varying degrees of financial distress. The continued financial distress or the insolvency or bankruptcy of any such supplier could disrupt the supply of components to us or our customers, potentially causing the temporary shut-down of production. Any prolonged disruption in the supply of critical components to us or our customers, the inability to re-source production of a critical component from a financially distressed automotive components sub-supplier, or any temporary shut-down of one of our production lines or the production lines of one of our customers, could have a material adverse effect on our profitability. Additionally, the insolvency, bankruptcy or financial restructuring of any of our critical suppliers could result in us incurring unrecoverable costs related to the financial work-out of such suppliers and/or increased exposure for product liability, warranty or recall costs relating to the components supplied by such suppliers to the extent such supplier is not able to assume responsibility for such amounts, which could have an adverse effect on our profitability. We are dependent on the outsourcing of components, modules and assemblies, as well as complete vehicles, by OEMs. The extent of OEM outsourcing is influenced by a number of factors, including relative cost, quality and timeliness of production by suppliers as compared to OEMs, capacity utilization, and labour relations among OEMs, their employees and unions. Outsourcing of complete vehicle assembly is particularly dependent on the degree of unutilized capacity at the OEMs' own assembly facilities, in addition to the foregoing factors. As a result of favourable terms in collective bargaining agreements concluded in 2007, the "Detroit 3" OEMs may insource some production which had previously been outsourced. A reduction in outsourcing by OEMs, or the loss of any material production or assembly programs coupled with the failure to secure alternative programs with sufficient volumes and margins, could have a material adverse effect on our profitability. The competitive environment in the automotive industry has been intensifying as our customers seek to take advantage of lower operating costs in China, Korea, Thailand, India, Russia, Brazil and other low cost countries. As a result, we are facing increased competition from suppliers that have manufacturing operations in low cost countries. While we continue to expand our manufacturing footprint with a view to taking advantage of manufacturing opportunities in low cost countries, we cannot guarantee that we will be able to fully realize such opportunities. Additionally, the establishment of manufacturing operations in emerging market countries carries its own risks, including those relating to political and economic instability; trade, customs and tax risks; currency exchange rates; currency controls; insufficient infrastructure; and other risks associated with conducting business internationally. The loss of any significant production contract to a competitor in low cost countries or significant costs and risks incurred to enter and carry on business in these countries could have an adverse effect on our profitability. Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in Canadian dollars, euros, British pounds and other currencies. Our profitability is affected by movements of the U.S. dollar against the Canadian dollar, the euro, the British pound and other currencies in which we generate revenues and incur expenses. However, as a result of hedging programs employed by us, primarily in Canada, foreign currency transactions are not fully impacted by the recent movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable. Despite these measures, significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar, Canadian dollar, euro or British pound, could have an adverse effect on our profitability and financial condition and any sustained changes in such related currency values could adversely impact our competitiveness in certain geographic regions. Contracts from our customers consist of blanket purchase orders which generally provide for the supply of a customer's annual requirements for a particular vehicle, instead of a specified quantity of products. These blanket purchase orders can be terminated by a customer at any time and, if terminated, could result in us incurring various pre-production, engineering and other costs which we may not recover from our customer and which could have an adverse effect on our profitability. In response to the increasingly competitive automotive industry conditions, it is likely that we may further rationalize some of our production facilities. In the course of such rationalization, we will incur further restructuring costs related to plant closings, relocations and employee severance costs. Such costs could have an adverse effect on our short-term profitability. In addition, we are working to turn around financially underperforming divisions, however, there is no guarantee that we will be successful in doing so with respect to some or all such divisions. We recorded significant impairment charges related to goodwill, future tax assets and fixed assets in recent years and may continue to do so in the future. Goodwill must be tested for impairment annually, or more frequently when an event occurs that more likely than not reduces the fair value of a reporting unit below its carrying value. We also evaluate our ability to realize future tax assets and fixed assets and other long-lived assets for impairment whenever indicators of impairment exist. The bankruptcy of a significant customer or the early termination, loss, renegotiation of the terms of, or delay in the implementation 11 Magna International Inc Annual Report MD&A